2/01/2011 @ 1:30PM

Universities On The Brink

Higher education in America, historically the envy of the world, is rapidly growing out of reach. For the past quarter-century, the cost of higher education has grown 440%, according to the National Center for Public Policy and Education, nearly four times the rate of inflation and double the rate of health care cost increases. The cost increases have occurred at both public and private colleges.

Like many situations too good to be true–like the dot-com boom, the Enron bubble, the housing boom or the health care cost explosion–the ever-increasing cost of university education is not sustainable.

Just 10 years ago the cost of a four-year public college education amounted to 18% of the annual income of middle-income families. Ten years later, it amounted to 25% of that family’s average annual income. The cost of attending a private university is about double the cost of public universities. Think of higher education as the proverbial frog in boiling water. It feels very warm and comfy but soon will be cooked.

Former President Bill Clinton has been speaking out, and President Barack Obama in his 2010 State of the Union address said, “It’s time for colleges and universities to get serious about cutting their own costs, because they too have responsibility to help solve this problem.” The camel’s nose is in the tent.

Over the past 14 years the average debt for a graduating college student has doubled. Today the loan obligation of graduating seniors is more than $20,000 for public university grads and more than $27,000 for graduates of private universities. More than two-thirds of all college graduates have student loan obligations. The number of graduates in debt increased by 27% over just the past five years. And, not surprisingly, the default rate has grown each year. In June of last year student loan debt reached $830 billion, surpassing credit card debt in America.

All this happened while total federal student aid more than doubled, in constant dollars, from $60 billion ten years ago to $120 billion today. Sadly, more federal student aid simply fuels the rising costs. The cost of education tracks with the growth in federal aid; the transaction cost for students is not lowered. The federal money effectively flows directly to the operating expenses of the Universities-which seem to rise in direct proportion to the flow of federal funds.

Because all universities offer some kind of financial assistance, the nominal tuitions are not the amounts universities actually take in. Discounting, often in the range of 25% to 35% of tuition, is offered as financial aid. But even after the discounting the average realized tuition revenue at universities continues to grow. The College Board projects that in 15 years, the cost of a four year college education at a private university will approach $400,000 (at the current rate of cost increases).

Now it is true that college-educated people normally earn more than non-college-educated folks. But over the past two decades the costs of university education–tuition, room, board and fees–have increased at a rate six times greater than the increase in the average earnings of college graduates. And in the past decade college graduates’ earnings have actually fallen. The value proposition is on a downward trajectory.

Where is all the tuition money going? Universities would reasonably argue that they are spending their funds to increase their attractiveness to students. If you’ve visited college campuses recently, you’ll have noticed new dormitories, food courts, athletic centers, high-tech classroom buildings or laboratories. The ranking of universities over the past 25 years has created a facilities arms race. And those physical amenities do affect students’ enrollment decisions.

Another phenomenon affecting rising costs is the perceived need to attract star scholars with attractive salaries, research support (including laboratory space), and light teaching loads–all because star scholars also affect rankings favorably.

And like any business, universities want to remain competitive on the salaries they pay their faculty. That gives rise to the comparative faculty salary survey. Since no university wants its faculty paid in the bottom half of their comparator group, the effect of every survey is to raise average salaries. It’s the Lake Wobegon effect: No one can be below average.

Similarly universities want to attract the best staff talent, and find themselves competing with industry for competent managers, communications experts, development people and technology specialists.

But all this costs money; hence the significant year-over-year tuition increases, irrespective of the economic environment.

If the salaries of college graduates are not rising, but student debt is, can the tuition increases continue? Is there any data to suggest college students today learn more than their predecessors? Or is there any evidence that what today’s students learn is retained longer than earlier generations? In business terms we’d ask, “Is the value proposition getting better?” It’s difficult to find any such evidence.

For many years igher education had a demographic wind at its back. The number of American students graduating from high school increased from 2.4 million in 1990 to 3.3 million in 2009. But that number is not expected to grow further for the next 10 years; in fact, for the next several years, the number of high school graduates in the U.S. will drop. So those demographics exacerbate the business problem for universities.

The U.S. demographic decline is not likely to be fully offset by international students. In the decade since the tragedy of Sept. 11, 2001, and the tightening of student visa controls, a number of new colleges and universities have been forming rapidly in India, China and the Middle East. Those new schools are not yet as sophisticated as America’s top universities, but they are accessible and affordable.

None of this is to deny the importance of a college education. A sound undergraduate education forms a basis for making a life. Graduate school, in contrast, is primarily about making a living. The years of college immediately after high school are a time of great personal discovery and intellectual maturation. It’s a precious time of life. So that makes it even more important that it not be priced out of the reach of a large swath of society.

Happily, free market capitalism abhors a vacuum, so the increasing cost of education has inevitably given rise to alternatives, including a new, for-profit college industry. There are today about 2 million students enrolled in institutions like the University of Phoenix, Corinthian, Kaplan and DeVry University. There are reportedly 5.6 million students, or nearly 30% of all higher education students, enrolled in at least one online class.

Another threat to our traditional means of delivering a college education is the many other ways people can now learn. Digital technology offers fascinating approaches to improve cognition. If you can buy a self-paced calculus course on DVD for $67, is it worth spending $5,000 to take the same course at a private university? Will you know more calculus? Of course the mutual learning that occurs in college is of value. But is it worth spending 75 times more for the same body of knowledge?

Well, what’s the answer? Will universities actually fail? Some will.

In fact, in the past decade, we’ve seen 124 U.S. institutions close their doors.

Yet colleges and universities can improve their life expectancy–and their relevance–if they focus on becoming more productive. There are many innovative ways that can be accomplished. It will involve taking advantage of disruptive technologies. Technology-assisted pedagogy can be enormously effective.

It’s difficult in today’s universities to talk about “productivity” or “efficiency” the way business does. Faculty members associate that idea with larger classes, a higher teaching load or lower quality. And given the lifetime tenure system and the co-governance structure of most universities, orderly change will not happen without the cooperation of the faculty.

But everyone, particularly faculty scholars, favors high-quality learning. Universities need to embrace the concept of “deeper learning”–increasing the value of a college education by delivering more education, and doing so in ways that increase retention. In other words, learn more per dollar spent, and retain what is learned longer.

Deeper learning means getting 150% or 200% of the knowledge formerly delivered in a given course. The Chronicle of Higher Education reported: “Several studies have shown that students learn a full semester’s worth of material in half the time when online coursework is added.”

There is so much classroom time that can be off-loaded to technology tools for self-paced learning in asynchronous time. And then the time spent in the classroom on the same subjects can be much richer with robust discussion and debate about the strengths and limitations of those tools and techniques.

Many four-year college degrees will inevitably be delivered in three years, or at least a three-year option will be available. The academic year can be lengthened; a nine-month academic year shortchanges many students and represents an inefficient use of facilities. Most students certainly don’t need three months off. That practice began in a society where children worked the family farms. Steve Trachtenberg, president emeritus of George Washington University, has said, “There is simply no reason undergraduate degrees can’t be finished in three years, and many reasons they should be.”

With two-thirds of private-university students going on for a master’s degree, those students could earn their two college degrees in four years–for the price of one today. That would certainly increase the value.

As you think forward just 10 more years, do you think you’ll see students carrying 50-pound backpacks of books? Costs and fees can be reduced by offering the textbooks and other reading material electronically. Having to buy physical text books will seem Neanderthal to tomorrow’s students.

And for future students, what will a “library” be? These students will have in their pockets handheld devices that can access virtually everything that’s ever been published.

At Boston University, as with a few other pioneering Universities, there are a number of exciting initiatives underway on technology-assisted pedagogy and increasing value. It’s an exciting beginning.

Importantly, in today’s knowledge economy, if America doesn’t make a rigorous, high-quality, affordable education available to more of its population, our quality of life will erode as will our place in the world. And the important, leading-edge academic research undertaken in America’s top universities won’t occur if the universities fail to develop a survivable business model.

These suggestions are but a few of the innovations that can be embraced by administrators and faculty alike. These deeper learning ideas can be reasonably implemented without resorting to the more dire actions struggling businesses take, like closing operations, cutting headcount or reducing salaries.

Americans can be proud of the higher educational infrastructure that has been created over the past two centuries. A strong, accessible education is second only to strong parenting if we are to build a sustainable society. So we must do all we can to help assure the survival of a superior higher education establishment. It is a real jewel in the American crown.

Louis E. Lataif is dean emeritus of Boston University’s School of Management, and former president of Ford of Europe.